Petroleum Inc

question 35

Multiple Choice

Petroleum Inc. (PI) controls off-shore oil leases. It is considering the construction of a deep-sea oil rig at a cost of $500 million. The price of oil is $100/bbl. and extraction costs are $50/bbl. PI expects costs to remain constant. The rig will produce an estimated 1,200,000 bbl. per year forever. The risk-free rate is 10 percent per year, which is also the cost of capital. (Ignore taxes) . Suppose that oil prices are uncertain and are equally likely to be $120/bbl. or $80/bbl. next year. Suppose that PI has the option to postpone the project by one year. Calculate the value of the real option to postpone the project for one year. (There is some rounding in the answer.)

• A)+$30 million
• B)+$50 million
• C)+$54 million
• D)+$70 million

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Definitions:

Positive Request

A form of communication that focuses on a positive or constructive outcome or action, often used to encourage or motivate.

Intangible Rewards

Benefits or compensations that cannot be physically touched but are valued by individuals, such as recognition.

Prestige

The respect, admiration, or high status accorded to an individual, organization, or object based on their achievements, quality, or importance.

Indirect Order

A command or instruction delivered in a way that is not straightforward or direct.